CPPIB flexes its muscle in board rooms around the world to stem climate change

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The Canada Pension Plan Investment Board, which invests on behalf of the country’s CPP pension scheme, used its influence as a major institutional investor to push 35 companies to make “material“ commitments and improvements to climate-related disclosures and practices in the past year, according to its latest report on sustainability investing made public Wednesday.

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Officials at Canada’s largest pension voted against 65 directors at 35 companies where they “concluded the board failed to demonstrate adequate consideration of physical and transition-related impacts from climate change,” the report said.

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CPPIB, which invests in public and private companies including direct investments, voted in favour of climate-related shareholder proposals that sought deeper disclosures on topics such as operational emissions management, asset portfolio resilience and public policy, the report said.

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Richard Manley, managing director and head of sustainable investing at CPP Investments, said the approach with public companies in the portfolio is to articulate clearly how the Canadian pension believes sustainability-related factors should be integrated to inform strategy and enhance returns or reduce risks in the business.

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“As a global investor, we proactively identify dynamic and emerging material business risks and opportunities and seek solutions to reduce or capture their potential within portfolio companies and align incentives,” he said in a statement.

When CPPIB officials do not see a concrete plan, they approach the company to see if anything is in the works that has not been disclosed. Sometimes that results in immediate progress, as it did last year with a large Asian company engaged in logistics and procurement that had a “very considerable … electricity emissions-related footprint,” Manley said in an interview.

“So this was a business that really needed to be doing more than was clear they were doing — but the engagement yielded very real insights.”

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If a company does not have a concrete plan, even after engagement, the pension giant has an “escalating” response — first put in place in 2021 — that begins with a vote against the chair of the risk committee of the board, or whichever committee is deemed to be the logical one for developing such a strategy. If nothing further is done by the following year, CPPIB casts its vote again the whole committee and can ultimately vote against the entire slate of directors, Manley said.

Over the past year, the Canadian pension also expanded its voting practice of pushing for more female representation on boards of directors by including two additional countries: South Africa and New Zealand.

“We expect to apply a … 30 per cent threshold to more countries and markets in the next few years including in emerging markets,” the sustainability report said.

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For CPPIB, which has a mandate to maximize investment returns “without undue risk of loss” and had net assets of $523 billion at the end of June, sustainable investing means following the objectives set out in its governing legislation against the backdrop of escalating climate risk, the report said. This includes looking for opportunities presented by the transition to a greener economy and towards net-zero emissions targets set by companies, investors and government.

“Maximizing the long-term value of a business today requires boards and executives to anticipate and manage a highly dynamic environment,” said John Graham, chief executive of CPP Investments. “Our sustainable investing approach helps to protect the retirement savings of the nation’s workforce.”

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In February 2022, CPPIB committed to ensure its portfolio and operations are net zero of greenhouse gas emissions by 2050. On Wednesday, pension management officials reiterated that they plan to do this by continuing to invest in companies across all industries “that are driving and demonstrating carbon-reduction innovations” and practices CPPIB believes will lead to “enhanced risk-adjusted returns.”

Shortly after Graham took over as CEO last year, he said CPPIB had no plans to institute a blanket divestment of oil and gas assets during his tenure, in part because he believes science will find solutions to many of the issues that have made environmentalists and some investors question such holdings.

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“Simple divestment is essentially a short on human ingenuity,” he said in April 2021, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.

By contrast, Quebec’s Caisse de dépôt et placement du Québec has committed to divest all its oil production assets by the end of this year. When this was announced in the fall of 2021, the assets were valued at $3.9 billion.

Targeting companies over environmental, social and governance (ESG) issues has been a powerful tool used by institutional investors, but there has been some pushback recently from large global investors. For example, BlackRock, the largest asset manager in the world, said last spring it was likely to vote in favour of fewer climate proposals from companies in its investment portfolio this year than it did in 2021.

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CPPIB’s Manley said he thinks the term ESG, which gained traction around 2004, is opening the door to debate and pushback because there are many different interpretations and applications that can stray from fiduciary responsibility and value creation.

“Unfortunately, the abbreviation ESG has become a lightning rod,” he said. “For some people, it’s exclusion, from some others, it’s avoidance of worst in class. For others, it’s an orientation towards the best in class.” 

But he said there should be no confusion or debate about ensuring management teams proactively identify and mitigate risks and identify and capture opportunities, which will result in the most informed business decisions and best outcome for companies regardless of the terminology used.

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“I don’t see there’s a debate to be had about that,” he said. “That’s just good business in this new century.”

Schroder Investment Management Ltd., a global asset manager, released an annual survey Wednesday that found 56 per cent of Canadian investors believe investing sustainably is the only way to ensure profitability for the long term.

The Schroders’ Global Investor Study surveyed more than 23,000 investors, including 1,000 in Canada.

Canadian investors put more emphasis on investor engagement on climate issues than their counterparts in the United States, according to the study, with 63 per cent of Canadian investors listing climate efforts including decarbonization as one of the three most important areas investors should engage on with companies, compared to 59 per cent of U.S. investors.

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